Sunday, June 2, 2013

Inflation 2: The Necessity of Growth

They be like, "Oh, that Gucci, that's hella tight,"
I'm like, "Yo, that's fifty dollars for a T-shirt ."
 -Macklemore, Thrift Shop

This is an expansion on the Inflation and Hierarchy post. To get an understanding of the situation, I think additional investigation of the tactic of "growthsmanship" will be needed.

If you want a good perspective on why growth has been so popular in economic policy talk, one good place to start would be Robert Collins' book on the subject, which specifically addresses growth policy in the contemporary American context. The point is straightforward: pro-growth policy has been a stalwart platform of both parties since World War 2, with Keynesian demand-side policy characterizing the Democrats. Republicans were restrained Keynesians up until Reagan, when neo-classical economics started to make a comeback and growth was encouraged from the supply side. Voters simply have no interest in policies that restrain consumption in any way.

Beyond this, both the problems and the virtues of growth economics have been interestingly stated for public consumption. Democrats have had the pleasant advantage of using Keynesianism in league with environmentalism as a policy matter, and a different post will address this. Suffice it to say, I am pro-environmentalism but not in the Democratic sense. Quite the opposite, I don't think democratic politics and environmentalism mix well at all, even if you discard the conventional party platforms.

The Mechanics

When I was talking about Bitcoin a while back, I mentioned that growth economics and currency held some relationship, and that relationship is fairly easy to define. Strong economic growth requires increases in the money supply, or at least, it significantly benefits from it.

With an inflationary currency - assuming the inflation is stable - the incentives for investors line up towards using their money instead of saving it. The concept is simple: inflation means that dollars buy less, so in order to keep your dollars from buying less, you have to invest them. Preferably, investors use it to create businesses that profit at a rate higher than the rate of inflation, and will create jobs in the process. Sometimes it doesn't work out that way, but that's the general idea. This isn't a political salesmanship idea; the trend is well-documented. In the 16th century, the volume of gold coming in from the New World via Spain helped lead to significant growth. Prices rose by a factor of four over the century, which isn't nearly as inflationary as it seems, given that we're talking about a hundred frickin' years. And in the process, the economy expanded quite nicely.

Now, assume that you have a slower-growing currency. Because money is more valuable and can be expected to stay more valuable, people are more inclined to hide the money in a Mason jar buried in the yard for a rainy day. Good for them, not so good for everyone else; a slower rate of exchange is bound to happen. People spend less. There's less economic growth. We want expansion, dammit!

Now, one of the criticisms of Bitcoin is that the slow growth of the currency would stifle economic growth in this manner. Similar things have been said about the gold standard. 

This doesn't mean that growth stops, but banking mechanics create some problems here. Assuming a hard currency, banks loan out money while keeping less of it on hand than they say they have; it's in the process, a risk that banks take based on the predictability of the demand for money at their bank and the expectations about economic growth. It's a confidence game. In good times, banks hold little reserves and loan out with some enthusiasm, regardless of the nature of the currency. But if the loans fail, or if the customers make a "run on the bank" and demand all or most of their deposits be returned to them, then you get panics and collapse. The result is a tendency for economic fluctuation, aka the boom-and-bust business cycle. 

Crashes generally create deflation; prices drop as businesses become more desperate to sell their inventory to more reticent consumers, trying to stay afloat. Deflation exacerbates the cycle. With a fiat currency like we have now, one where the banking system can print more money in case hell comes to pass, there is a bit more control.

You can look at this situation and ask the obvious question: why the hell don't we just try some other way to restrain the business cycle, other than killing the value of currency? Does nothing else work?

Well, we don't really know, but probably not. Society's attitude about investing is weird. When there's a boom, the majority of people get caught up in the attitude, and go on a borrowing and spending binge. This helps push the growth. In a recession or depression the opposite happens. Optimism and pessimism are difficult to politically deal with, especially in a democratic society. There are already enough people in this country who think that the Fed is a destroyer of worlds, and all Bernanke has really been trying to do is exactly what the textbook response to a recession is supposed to be: make sure there's no deflation. The point is, any different solution would require something that democratic governments will never produce: a more disciplined consumer and investor marketplace.

You might also ask, what the hell is so wrong with deflation?

That's a better question. Falling prices sound awesome. But the answer is, if you're an employee, a LOT is wrong with deflation. Say that a depression comes along and your company sees a reduction in business to the tune of 20-30%. That's not the end of the world, but a reduction of 20-30% in revenue does not result in employers paying their employees 20-30% less. No employee would stand for it; that's not their fault, as they're as productive as they ever were. It's the business owner's responsibility to handle it, and they generally handle it like this: they fire 20-30% of their workforce

That's what they have to do. Some companies are more loyal to their employees than others, but for many of them, there's little choice if they want to stay in business. Times are tough. This isn't a knock on them; that's how things have to be. But as the unemployment numbers rise, perspectives do not favor the employer.

As a consumer, falling prices sound great, until you realize that you're in debt and you haven't been saving your money. Debt becomes more expensive when there's deflation: if you owed $20,000 on credit cards and there's 10% deflation, you now owe the equivalent of $22,000. Plus, you might be out of a job: the fate of the average voter in the world is much more dependent on there being employment available than on there being low prices.

To put it simply: it's perceptually and politically better for the system to encourage inflation. It's better because more people are in debt than are saving, and therefore it's politically more advantageous to support debtors than savers in a democratic system.

I've figured this out opening a small business. I'm going to do the bulk of my production in-country, but some accessories will be bought from foreign companies found on, and let me tell you, the cost of many goods wholesale today is so stupidly minuscule that one may reasonably wonder why the hell we pay so much at the register here. That Super Soaker you paid $19.95 for likely cost about a dollar to produce. Some products I could concievably carry would grant me well over 500% on margins. For a businessman, this is ludicrous; all I have to do is take a relatively minor risk by carrying a significant inventory, buying hundreds of units at a time. One would think economics would have driven down the cost of everything by now, with such cheap production available.

But it doesn't; the margins are what pays the wages of most people in this country. Everything eventually costs the labor required to produce it, plus rent-seeking. So there's a rent-seeking element that is responsible for many, many people having a job, and that comes from the relative stability of the business sector. You get used to going to Wal-Mart and Target for your crap. Your local shoe store lets you try them on first. And then there's brand loyalty, a form of trust built on return policies, threats of legal action, and location. It's convenient. You don't have to think too much, just compare the prices at the store at most. You sure as hell aren't going to spend hours of your life finding the absolute lowest price on something that costs twenty bucks; nickel and diming is for losers. The field of economics looks at consumers as demanding low prices all the time, which they certainly prefer, but holy shit the American consumer is lazy as hell.

The status and behavior of the consumer does not depend on thriftiness. People have plenty, as a matter of volume. What this has evolved into is a cultural situation where people go in for goods that describe who they are as a person, attaching themselves to brand identity. You can call someone a Wal-Mart person and mean it as derogatory; you move up a bit at Target, then get into "real" retailers and brands. Gucci is just the beginning; how much of our identity gets bound up in cars and homes? Ask my mother when she gets done watching House Hunters. This has become who we are as a people: consumers. Modern capitalism is consumerist, not "producerist", and all this excess choice exists to create a place where you can become who you want to be through your consumer decisions. You need to work to finance your lifestyle; rebellions against this find some light counter-identity in urban farming, living off the grid, and other hipster fads... and brands are moving to exploit the new trend.

Big name retailers and well-known brand names have a form of market power that's quite significant today, with our over-crowded marketplaces: they can draw people into the store, and when people think that they need to buy something, they almost automatically go to these places and brands. They have power in the attention economy. The low-ball online retailer does not, although and other aggregated one-stop-shops are reducing this market power very slowly. Still, you should hope that they don't do it much faster; millions of people depend on the rent-seeking power of big name stores and brands to provide them with jobs. Those are institutions in this culture. With a big company, you usually get job stability, which is about the last bastion of cultural expectation that empowers employees. That creates standards which are held in contrast to small businesses, forcing those small businesses to treat their employees comparatively. This means, of course, that they keep charging high prices relative to manufacturing costs for their goods. Job insecurity results in employees more desperate to take what they can get, and the market power of big business, with their significant market power, eases that pressure.

This is all possible because the system encourages expansion as fast as possible. The restraint comes only from consumer hesitation, which vanishes in good times, when credit is cheap and jobs are at least available enough to justify charging it now and paying for it later. It helps for people to feel rich; that's how we do individualism today. The pressure to economize still exists to some extent for retailers and manufacturers, but low price is less important than image and advertising skill. The consumer sphere is where we show our value in the hierarchy. Work is the primary way we acquire that value. We need high-growth economics to be useful and valuable as employees, and thus we need a growing economy and currency. Without it, even if we have good jobs now, they might not exist long and they might not have existed at all without the last seventy years of American economic history focusing on expansion. It makes everything easier.

Basically, the system as it stands, inflationary tendencies and all, can be traced back to your unwillingness to get your ass off the couch to find a better deal, and the employment made possible by your sloth. The system must adapt to you, wise voter. So by all means, stay on that couch until an ad on your iPhone tells you that Gucci T-shirts are on sale.

Class by Choice

Question: why isn't every employee an independent contractor?

On the surface, the benefits of being independent seem strong. You have a degree of control over your activities, assuming that they're strongly demanded enough to garner interest from those hiring you as a contractor. You can hold on to your money instead of essentially paying for an interest-free loan that the government will pay back next year. Basically, it wouldn't be wage slavery.

But then, wage slavery has its advantages. You probably don't have strong demand for your services most of the time, but wage jobs get you a paycheck anyway; don't complain about being bored when you have the privilege of being bored on the clock. A halfway decent employer will help cover all sorts of benefits, since it gets them a tax write-off, and consistent schedules have advantages when you have other shit you want to do and need to schedule your life. Being a conventional employee is a matter of convenience for all involved: you work a solid number of hours and the employer pays a solid wage, and it becomes comfortable. People generally like comfort. The modern struggle is the struggle to be valuable for the individual acting in a market society, and being an employee means that you have an arrangement that grants stability. You can adapt to your wage with just a little discipline, and more and more, even that discipline seems redundant as Social Security, public education, food programs, and government health care assures the individual that they can only screw themselves so badly. The struggle becomes the drudgery: it gets old after you're used to it, and you want more variety. But historically, that's a very small degree of discipline that the working world requires of you. 

What the government really encourages is large-scale, stable employment. The government can regulate large corporations more easily than many small businesses, and since large corporations usually have enough market share to assure some financial ability to consistently pay more for employees, they can expect corporations to pay well and provide big fringe benefits that look good on paper. Unions have enjoyed this for decades, albeit with gradually reduced political and economic influence. People don't really want to handle savings, insurance, and looking for work any more than necessary, even if the potential benefits are great. Most people suck with money.

And really, it's not wage slavery. It's more like the remains of serfdom, without the clarity or permanence. Remember a few paragraphs ago, when I was talking about the 16th century in Europe? Back then, being a peasant was a very normal way for people to survive. You generally got food, shelter, and clothing at the least, with a slight spending allowance from your own marketable projects, even in eastern Europe where conditions were the worst. Feudalism sounds ugly, but that's just our way of looking at it, of course: the reality is one of a relationship between landowner and subject imbued with a near-religious sacredness that is completely lacking today. The arrangement was one of responsibilities of one party to another, taken on with much ceremony and social pressure on all parties to conform to roles. It was institutional and expected. There were good lords and bad ones, good serfs and bad ones, healthy relationships and unhealthy ones. 

Conversely, the 16th century was the period in which the serf/lord relationship started to fall to the wayside and the merchant class took on a new and more powerful role. The century after the sixteenth was the century when things were going worse, with less Spanish gold and more Malthusian population limits and war; the lords made a slight comeback, but it was strictly economic convenience, people needing to eat so they went back to the being land tenants. The attitude was changing. That goes along with the individualism of the era, which was in part a product of the Protestant Reformation.

Many of the complaints from that time would sound familiar today. The difference today is that there is no straightforward agreement on who owes what to who. The general idea that employees owe the employer the respect of coming in on time every shift and doing the job is about as elaborate as it gets, and that comes in for heavy revision when you think the boss is being a dick. The idea that the employer owes the employee any kind of loyalty is just as sporadic. Most people would say that employers are worse than employees in these situations today, but of course they would say that: most people are employees. Jack Donovan's recent article sums up an attitude that's already well established out of most people I know. That attitude is not so much being wrong as failing to recognize, for whatever reason, the reality that we are not as necessary to employers as we'd like to think we are most of the time. We have no leverage, so why not see the system as mercenary? There are no institutional obligations anymore; we call this freedom.

The Need for a New Structure

Institutions are not physical things. They are arrangements, formalized into social expectations, roles to play with defined privileges and responsibilities. You look at any stable arrangement for a while, and you can begin to gather an appreciation for the organization of it, for the sense of identity and place that a well-ordered society can provide. 

At least an ordered society can function predictably and with some semblance of justice. Justice is, after all, really a matter of expectations. Today, we want and expect equality, which is ludicrous and pathetically short-sighted. The expectations have become radical; we expect government to do what is necessary to give us value as economic actors, expect big business to sacrifice some of its power to help us out of sheer Christian decency, even as the population at large abandons Christianity with enthusiasm. The individualism is such that our eccentric lifestyle choices, our behaviors and style which might come off as a middle finger to others, is expected to be tolerated without question. Meanwhile, when the business classes blow us off in the name of them pursuing their self-interest, we hate their guts. We want noblesse oblige, but have no moral justification for it in an individualist culture. Say what you want about our shitty behavior not being on the same level as people unable to find work and eat, but no one owes any of this to us. You want individualism, then the responsibilities must be measured with the rights. 

In the first Hierarchy post, I talked about explicit and implicit hierarchies, and I stated that explicit hierarchies have serious advantages. This kind of thing is what I was talking about. Explicit hierarchies hold the security we want, by dividing up responsibilities explicitly. The implicit, market-based hierarchies we operate on now, counting on values expressed in the markets to fuel our world, turn against us when we want stability, when we find that we aren't nearly as valuable as we think we are to others. You can call it oppressive fear that drove people to accept aristocracy and its rigors before, but any time you fear for your economic welfare, you experience that fear yourself. It is tremendously, metaphysically wrong that this happens? It probably feels like it, but it's not. A lion chasing a tasty human on an African plain millenia ago might have felt unfair to the human, but it was also reality. Fairness is a luxury of a society that develops systems to ensure that expectations meet reality. The more individualistic we get, the less structured our world becomes, the less fair we should expect it to feel.

We should feel lucky that the system tries, with its inflationary currency and democratic suckup tendencies, to help us out. We don't, we never give any thanks, but we should, because given our behavior, this system provides what we want. It has kept food cheap, integrated huge numbers of women into the workforce over the last half-century, its tax revenues have been harnessed to turn over significant public benefits, and you can be pig-ignorant about money and know that the government won't allow you to be exploited "unfairly". But it can't change all of reality to work for your benefit. And it doesn't owe you that.

If you want the benefits of noblesse oblige, then we should start that conversation honestly. I've been thinking it for a while. If you don't, then it's your life and you should be thankful that the system you have to deal with works as well as it works.

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